H&M may be repeating Macy's mistakes

Fast-fashion powerhouse H&M has built its business on an ability to identify the biggest runway trends, and quickly produce its own versions to sell at a lower price. But for a company that's renowned for speed, there's one area in which some think H&M may be moving too fast — its rapidly expanding real estate footprint.

Already boasting more than 4,000 shops around the globe, the Swedish retailer has plans to boost its store count between 10 percent and 15 percent annually. That includes roughly 425 net new stores in 2016.

Yet at the same time, H&M's sales growth and profitability per square meter are slowing. And elsewhere in the industry, retailers who years ago expanded overzealously are now dialing back their store fleets, in an attempt to revive their own store productivity.

During the quarter ended in May, H&M's sales excluding value-added tax grew just 2 percent. That's despite it adding more than 400 stores from the prior-year period. It also marked a substantial slowdown from the previous year's growth, when sales rose 21 percent using that same metric.

Though currency swings have recently taken their toll, this type of disconnect is nothing new to Morgan Stanley analyst Geoff Ruddell. In a note to investors earlier this year, the veteran analyst said 2016 may be a tipping point for H&M, whose profit densities have been on the decline since 2007.

Based on Ruddell's analysis, H&M's 15 percent annual-square-footage expansion has allowed its operating profits to move higher — effectively concealing its slipping store productivity. But Ruddell argues this trend cannot go on forever, and this will likely be the year when H&M's profits start to contract.

Not everyone is concerned about H&M's expansion plans. Given the retailer's global footprint, multiple brands and experience operating international stores, Stifel analyst Richard Jaffe told CNBC he doesn't consider H&M's growth either "dangerous" or "risky."

"H&M is well-suited and pretty disciplined about [their] growth," Jaffe said. "This is not frivolous growth."

For a company rooted in Stockholm, "you've got to be willing to travel" to scale the business, Jaffe said. Indeed, H&M's home country is only its sixth-largest market by revenue (Germany is its biggest, followed by the U.S.).

"These guys are among the best equipped to operate cross border," Jaffe said. "They've been doing this for so long."

So while hundreds of store openings each year sounds aggressive — particularly in light of Macy's recent decision to shutter 100 of its namesake locations — it's important to keep these openings in context, Jaffe said.

Not only is H&M adding new markets to its resume, but white space remains in more mature places such as the U.S. Even after Macy's completes its latest round of closures, it will operate close to 800 stores here through its Macy's, Bloomingdale's, Bluemercury and outlet locations. That compares with just 433 as of May for H&M, which also operates stores under the COS, & Other Stories, Cheap Monday, Weekday and Monki nameplates. Aside from H&M, COS has been the retailer's biggest priority in 2016.

H&M is an ideal tenant to fill empty space in malls. Thanks to its broad consumer appeal and cavernous stores, property owners often treat the retailer as an anchor tenant, giving it a break on rent, Jaffe said. Sometimes, if H&M agrees to open a store in a less desirable mall, the owner will cut them a deal on the space they want in a more lucrative center.

"They take a lot of space ... [and] they help drive traffic," Jaffe said.

Although fast-fashion players including H&M have been a culprit for many retailers' struggles, they're not immune from the broader industry's woes. In recent months, H&M's sales have been pressured by deeper-than-planned markdowns, thanks to uncooperative weather and currency fluctuations.

"It has been a challenging half-year for fashion retail in many markets, but we have great confidence going forward," CEO Karl-Johan Persson said in a statement accompanying its six-month report in May.

Sales trends decelerated slightly from May into June, growing 8 percent in local currencies from the prior year. And while they picked up modestly in July, recording a 10 percent lift, that growth was still well below the 16 percent increase recorded in the prior-year month. The company will release its fiscal third-quarter sales next week.

Even before its sluggish second quarter, Morgan Stanley's Ruddell was skeptical that H&M could keep its profit engine churning. So far, he noted, the retailer's selling space has been growing at a faster clip than its profit densities have fallen, allowing its operating profits and earnings to eke out gains.

Whereas Morgan Stanley estimated H&M's earnings before interest and taxes at more than 10,000 Swedish krona (nearly $1,200) per square meter one decade ago, that metric has since tumbled to roughly 5,000 krona. H&M does not disclose its selling space, so Morgan Stanley generated its estimates using the company's store count and its guidance regarding the average store size.

Investments in H&M's online operations have likewise weighed on the company's margins.

"To be clear, we are not suggesting that profits will plunge this year," Ruddell wrote. Instead, he expects the declines will start off modestly, and then accelerate "rapidly."

"If current trends persist it is a matter of simple mathematics that profits fall 40 percent by 2020" and "all but disappear by 2022," Ruddell said.